Many workers who have been providing their services through an intermediary, such as a personal service company (PSC), may find that their company is no longer required. This may be because from April the tax advantages associated with operating through a PSC are lost. Alternatively, it may be because their end client does not want the inconvenience of operating the off-payroll working rules and has decided only to use ‘on-payroll’ workers, putting workers previously using PSCs on the payroll.
Where the PSC is no longer required, the question arises as how best to wind it up and extract any remaining cash.
Striking off, can be an attractive option where the PSC can pay its debts, and has less than £25,000 left in the company to extract.
The advantage of this route is that sums paid out in anticipation of the striking off are treated as capital rather than as a dividend, with the result that the capital gains tax annual exempt amount, if available, can be used to reduce the taxable amount. Where entrepreneurs’ relief is available, any taxable gain is taxed at only 10%. To qualify for this treatment, the company must be struck off within two years of making the last distribution.
If the amount left to extract is less than £25,000, but it would be preferable for it to be taxed as a dividend, for example, because the dividend allowance and/or the personal allowance are available or the distribution would be taxed at the lower dividend rate of 7.5%, striking off can still be used. However, to prevent the capital treatment applying, it would be necessary to breach one of the conditions so that the dividend treatment applies instead. This can be achieved by waiting more than two years from the date of the last distribution before striking off.
Members’ voluntary liquidation (MVL)
Where the funds left to extract are more than £25,000 and it would be beneficial for them to be taxed as capital – for example, to benefit from entrepreneurs’ relief or to utilise an unused annual exempt amount, the members’ voluntary liquidation (MVL) procedure can be used.
An MVL is a formal procedure; the director(s) must provide a sworn affidavit that creditors will be paid in full and a liquidator must be appointed.
If you are thinking of winding up your personal service company, and would like to consider the best way from a tax perspective, give our Corporate Tax Team a call on either 01788 539000 or 0116 261 0061.